France has reported a structural deterioration in the trade balance for goods since 2015. In January 2022, the deficit swelled to a record high, at a cumulative 12-month total of EUR 73 bn according to the Bank of France’s balance of payments statistics (EUR 88 bn according to the definition used by the customs office1). The trend for the industrial goods deficit to swell has accelerated since 2020 with the decline in aeronautics exports since the beginning of the Covid-19 pandemic. The deterioration observed since November 2021 is mainly due to higher oil prices.Yet the current account balance, which combines all of France’s foreign trade2, draws a different picture: the cumulative 12-month deficit was limited to EUR 23.4 bn in January
Euro notes and coins were introduced on 1 January 2022, and the euro is celebrating that 20th anniversary in fairly good shape. However, there are still many plans to improve and strengthen the European project and increase integration. This is shown by the topics on the agenda during the French presidency of the Council of the European Union over the next six months. Priorities will include reforming European fiscal rules, which will be a major topic of debate in 2022. Discussions are underway and decisions should be made this year. The challenge will be to avoid an anticlimax
Gabriel Boric, the candidate heading up the very broad left-wing coalition, won the second round of voting in Chile’s presidential election on 19 December, beating J. Kast, the far-right candidate. While the country’s economic fundamentals have held up relatively well over the past two years, the incoming administration (taking office in March) will have to deal with a number of very thorny issues. Chile’s health situation, high inflation and restrictive monetary policy will be a drag on growth in the short to medium term. What’s more, expectations among the country’s population are very high concerning pension system reforms, access to healthcare and education
The victory of the Liberal Democratic Party in the October general election allows prime minister Kishida to implement his policies. In November, he presented an unprecedented fiscal package amounting to some JPY55.7trn or 10% of GDP. In 2022, GDP growth could rise to 2.6% after 1.7% in 2021, largely driven by private consumption.
In most European countries, the structural primary deficit should shrink next year. This reduction represents a negative fiscal impulse, raising concern that it would act as a headwind to growth. However, the level of the primary deficit is such that it still corresponds to an accommodative fiscal stance. Taking into account national fiscal policies as well as expenditures financed by the Recovery and Resilience Facility and other EU grants, fiscal policy in the euro area should have a significant positive impact on GDP growth next year, thereby accompanying and strengthening the ongoing recovery. In addition, it should enhance the effectiveness of the ECB’s accommodative policy.
So far, Egypt’s economy has weathered the Covid-19 crisis without any significant worsening of its main macroeconomic indicators. GDP growth has remained positive, and the country's budget and external balances are relatively stable. The macroeconomic stabilisation achieved in previous years and external financial support are the main reasons behind these positive performances. In the short term, the outlook is mixed. The rebound in inflation, if it were to persist, could trigger a cycle of monetary tightening, with negative consequences for public finances. In addition, Egypt's external vulnerability remains significant given structural current account deficits and dependence on portfolio investment flows
In the Eurozone, gross state-guaranteed loans[1] outstanding amounts[2] issued in response to the Covid-19 pandemic stabilised at EUR 375 bn in Q2 2021. This stabilisation is notably due to the decline in state-guaranteed loans outstanding amounts granted by French and Spanish banks (down EUR 13 bn and EUR 2 bn, respectively), the first decline since the scheme was introduced in Q2 2020. Together, the two countries accounted for 64% of all state-guaranteed loans in the Eurozone in Q1 2021. This decline, combined with the much smaller decline in state-guaranteed loans outstanding amounts by Belgian and Latvian banks, cancelled out the ongoing increase in SGLs in the other Eurozone countries, especially Italy and Germany (EUR 10 bn and EUR 1
In the 2022 draft budget bill, the French government foresees a deficit of 8.4% of GDP in 2021 and 4.8% of GDP in 2022 (vs. 9.1% in 2020). The public debt ratio is expected to increase to 115.6% of GDP in 2021 (from 115% in 2020), before declining slightly to 114% in 2022. The large reduction in the deficit between 2021 and 2022 is primarily automatic. The improvement in the cyclical deficit is expected to contribute 1.6 points, while the 2.1-point reduction in the structural deficit is mainly due to the halting of most of the emergency support measures.
Although the significant increase in inflation in most advanced economies is expected to be transitory, it is necessary to focus on the potential consequences of inflation staying temporarily high for longer. Companies that hitherto have been reluctant to raise prices might do so after all, higher inflation could weigh on spending but also cause wage demands to grow, inflation expectations could drift higher, the market sensitivity to growth and inflation surprises would increase and there could be fears about a change in the reaction function of the central bank. In the coming months, investors and central banks will scrutinise data in parallel, but the former will react more quickly should inflation stay high.
In response to the Covid-19 pandemic, the US Congress set up the Paycheck Protection Program (PPP) in April 2020 to provide loans backed by the Federal government to small and medium-sized enterprises (SME). When subscriptions closed on 31 May 2021, about USD 800 bn in PPP loans had been issued. Banks originated 80% of these loans and non-banking lending companies and fintechs issued the remaining 20%. Several aspects of this programme differ from France’s state-backed loan programme (PGE), especially its fiscal cost. First, in the United States, the Federal government fully covers the credit risk associated with government-guaranteed loans1. Second, American lenders receive fees to compensate for the cost of originating PPP loans (between 1% and 5% depending on the principal amount)
On the whole, the US economy has recovered very quickly, albeit unequally, from the loss of business caused by the Covid-19 pandemic. Exceptional Federal transfers have fuelled a spectacular rebound in private consumption, so much so that it is nearly overheating. Faced with a global parts shortage and hiring troubles, companies are having a hard time meeting demand. Prices have come under pressure. For the US Federal Reserve, the time has come to begin withdrawing monetary support. The debt ceiling has just been hit, and major budget bills remain in suspense until an agreement to raise the limit can be reached with the Republicans.
After paying a heavy toll to the Covid 19 pandemic, the UK is getting back on its feet. Now that more than 80% of the adult population has been vaccinated, the UK economy was able to reopen for business this summer and to operate almost normally despite the spread of the highly contagious Delta variant. Just as the recovery is running up against supply-side constraints, the government of Boris Johnson is removing fiscal support measures as it proclaims the end of “whatever the cost”. Euphoric so far, the recovery should calm down somewhat by the end of the year.
Initially tempted to experiment with herd immunity to combat Covid-19, the Scandinavian country with the highest number of Covid-related deaths has largely converted to vaccinations, and the economy is on its way to returning to normal. Sweden is taking advantage of its specialisation in machinery and transport equipment, for which there is currently strong global demand. Dynamic exports are boosting corporate investment. As the Riksbank prepares to end its securities purchasing policy, the Swedish government is trying to avoid withdrawing its fiscal support too abruptly.
India’s public finances remain fragile, though strengthening over the first four months of the current fiscal year (to 31 March 2022). The central government’s fiscal deficit hit a high of 9.2% of GDP at the end of the 2020-21 fiscal year from an average of 3.8% of GDP over the previous five years. Over the same period, public debt has steeply risen, and is estimated to have reached a high of 88% of GDP in March 2021. The rapid deterioration of the public finances is the result of increased public spending in response to the Covid-19 crisis, but is also due to an extremely low fiscal base (total government’s receipts only reached 8.6% of GDP even before the pandemic). Under such circumstances, one might have feared a deterioration of the India’s sovereign rating
China’s public finances have been deteriorating for several years now, and the trend accelerated in 2020 with the Covid-19 crisis. Reforms introduced since 2014 have made the public sector’s accounts more transparent and improved the management of local governments’ budgets and debt. However, those changes have not stopped fiscal imbalances building up. In addition, large quasi- and extra-budgetary operations exist alongside the official budget, and there are many, sometimes opaque, links between the various public-sector entities. This means that analysing the public finances is often a complicated exercise.
In the first quarter of 2021 cumulated amounts of state-guaranteed loans (SGLs) granted by euro area banks reached EUR 376.4 bn, from EUR 184.7 bn in the second quarter of 2020. The proportion of total lending to non-financial corporations (which has remained relatively stable) represented by SGLs thus rose from 3.3% to 6.9% over the same period. French, Spanish and Italian banks have made a particularly substantial contribution to supporting economic activity during the Covid-19 pandemic. They granted 90.6% of all SGLs across the euro area (EUR 131.7 bn, EUR 108.7 bn and EUR 100.5 bn respectively) whilst their share of total lending to NFCs was only 57.7% on average between the second quarter of 2020 and the first quarter of 2021
The Covid-19 pandemic has had a significant impact on the Moroccan economy. After an unprecedented 6.3% decline in GDP in 2020, the first signs of a recovery are still fragile, even though vaccination campaigns are progressing in both Morocco and Europe, by far the country’s biggest trading partner. This is mainly due to the sluggishness of the tourism industry. It is thus vital that the authorities continue to provide support this year. Despite the rise in public debt, fiscal consolidation is unlikely to start before 2022. The rating agencies S&P and Fitch have downgraded the country to speculative grade. For the moment, however, macroeconomic stability is not a major source of concern. But tight fiscal manoeuvring room could become problematic in years to come
One year after the introduction of State-Guaranteed Loans (SGLs), 39% of managers of the SMEs that took them out have indicated that they have made little or no use of the funds, whilst barely one-third stated that they had used the majority of their loan. This precautionary behaviour led companies to hoard all or part of their SGL in order to build up a liquidity reserve under favourable terms. Meanwhile, the share of managers who expect to repay their loans in full over several years has increased (41% in September 2020 to 56% in April 2021), whilst the proportion expecting to make at least partial repayment in 2021 has decreased (from 36% to 23% respectively)
The economic recovery could be weakened by a second wave of Covid-19 and a fresh surge in inflation. With the government seeking to step up the pace of reforms to support growth over the medium term and improve the business environment, the number of protests against the moves is mounting, with protestors’ ire directed particularly at the privatisations that the government is counting on to cut its budget deficit. In the banking sector, banks currently are able to deal with the expected rise in credit risk. Nevertheless, in order to support a resumption of lending growth, a new injection of capital into state-owned banks has already been planned, alongside the creation of a defeasance structure.
The Qatari economy began 2021 under relatively favourable conditions: thought the regional embargo ended, the Covid-19 pandemic is still active. Despite the fall in oil prices in 2020, the fiscal and current account deficits remained limited. Over the medium term, the development of new gas export capacity should further strengthen an already solid macroeconomic position. The main source of vulnerability remains banks’ external indebtedness, which is very high and continues to grow as the economy’s expansion accelerates. However, government support is guaranteed, and the external position of the banks should be restored as a result of the expected slowdown in lending and increase in deposits.
Gambling has risks, but sometimes you win big. No stranger to risky gambles (Brexit, herd immunity to Covid-19…) the UK Prime Minister, Boris Johnson, can now claim that one of his wagers – betting early and big on vaccines – has allowed his country to be amongst the first to see the light at the end of the tunnel. Having been in strict lockdown since the beginning of the year, and whilst also suffering from a collapse in trade with the European Union, the economy now seems to have touched bottom; economic surveys and mobility reports promise better days ahead. Both fiscal and monetary policy will help support the recovery, before thoughts move to addressing the deficit, with the first turn of the screw expected in 2023.
Totalling USD 1.9 trillion or 9 percent of GDP, the American Rescue Plan ranks among the largest stimulus packages ever launched in the United States. The plan aims to overcome the Covid-19 pandemic, but does not stop there. The new supportive measures, combined with those approved in December 2020, could rapidly bring the US economy under pressure; Inflation is not the biggest threat, even though it is expected to rise above 2%. The surge in prices is likely to be short lived since global competition and the accelerating digital revolution are bound to have a moderating effect. Among the possible harmful effects is the risk of fuelling speculative behaviours in certain market segments (tech stocks, high-yield bonds…).
Before the onset of the Covid-19 pandemic, the United Kingdom had already begun to come out of the “age of austerity”, to borrow a phrase from former Prime Minister David Cameron. The massive intervention of UK authorities to support the economy through the Covid-19 sanitary and economic crises has significantly strengthened this trend. The government deficit ran at almost 20% of GDP in 2020, and the ratio of government debt to GDP increased by twenty percentage points to nearly 100%. Once the crisis is over, some adjustments will be needed. That said, the Treasury’s eagerness to bring public finances back under control rapidly could be counterproductive if it stifled the economic recovery
While the first repayments of State-Guaranteed Loans should take place at the end of March 2021, the amounts granted reached a cumulative sum of EUR 132.2 bn as of 12 February 2021 according to the Banque de France. Since their introduction, the SGLs have benefited more broadly the branches most penalised by the COVID-19 pandemic. Unsurprisingly, the accommodation and food service activities, which are still subject to administrative closures, are thus among those that have made the most intensive use of SGLs[1] in terms of amounts granted and number of beneficiaries. Our graph illustrates the general observation that the greater the drop in value added in 2020, the greater the use of SGLs
